Updated 8 November 2020
With the election result sealed with the Democrats taking the key state of Pennsylvania, we dive into what the potential risks and opportunities for investors and super fund members are. It was widely reported that the uncertainty around a final election outcome will be negative for global markets initially, however – based on past results and a surprise outcome of a divided congress, where the Democrats hold the House of Representatives, and the Republicans the Senate - such election volatility will be both tempered and temporary and as such we should be more focused on what is a little further out on the horizon.
It is no surprise that many investors have been considering how the result could impact their portfolios. For the last few months, markets have been paying close attention to the US election for good reason. Joe Biden as nominee for the Democrats had been campaigning the proposition of higher taxes, more regulation, and higher economic stimulus – fundamentally unwinding in part the tax cuts and deregulation that the Trump administration has enacted during its term in office. In addition, the dramatic turn of events on the night of the election with Trump’s announcement that he will contest the validity of the election at the Supreme Court, added further uncertainty to already nervous markets.
In the immediate lead up to the election, we saw a trickle of this uncertainty reflected in the US markets, which pointed to an increase in volatility over the coming months. Some of the events that supports the rational for possible ‘rough seas’ ahead in the short term following the election are:
Putting aside the natural and expected volatility over the coming days, we can summarise the investment related themes that relate to the Democrat win. However, regardless of the electoral outcome, the ‘3rd wave’ of COVID-19 playing out across the US, and the application of fiscal and monetary policy, whichever party was going to hold power ultimately will have more sway over markets.
With Biden seen as a more moderate leader than Trump, the Democrat victory will ensure market volatility is limited as the expectation is that the economy will not be weaker. So, expect share markets to strengthen on the Democrat win. However, a tailwind for markets will be Biden’s trade and foreign policies that are focused on rebuilding ties with trade partners and reducing the current conflict with China, the 2nd largest economy in the world.
With the surprise split house, the Biden administration will be hamstrung in the enactment of a smooth passage to implement part of their pre-election promised agenda for government. This includes a raft of large-scale spending on sustainable energy and renewables, changes to health care and changes to taxes (higher for corporates and high-income earners), and possible re-regulation of financial markets and institutions.
Already markets are positioning for a moderation or even inability of the Democrats to enact their high income and corporate tax increases, and parts of the left-leaning party policies around the Green New Deal. With this, expect to see share markets move upwards over the coming week. Policies where there is already mutual agreement, such as infrastructure spending, will also be seen as a longer-term positive for markets.
In support of the above, historically it has been observed that the US markets have delivered average stronger returns during times when the incumbent party does not have control of the senate.
As markets are forward looking, there had already been positioning for a Democrat win.
Initial reactions of the expected Democrat win saw our market, the ASX, finish up 4.5% over last week, which included the positive reaction to the RBA’s cash rate announcement on Tuesday 3 November. This was followed by Asian markets reacting on the expectation of election certainty with Japan’s Nikkei up over the week by 5%, India’s SENSEX up 5.8%, and the Hong Kong Heng Seng up 6.7%.
As US markets closed on Friday, markets rallied over the week with a 7.4% lift in the broad S&P 500 and a 9% lift in the tech index, the Nasdaq 100. Over the week we saw the US currency remain under pressure, falling nearly 2% as a result of cautious investors buying US treasuries (bonds) to take defensive positions on (the then) market uncertainty. The reaction to UK (FTSE 100) and EU (Euro STOXX 50) markets were volatile during the early part of the election week, however finished strongly up 6.3% and 7% respectively. Important to note is the EU regions sensitivity to the election being that the US is the European Union’s largest importer of goods.
Expect market volatility, even being the result of the election has emerged over the weekend. Investors will, in these early days, position speculative trades to try to take advantage of certain markets and sectors that were called out further up in this article. As always, whilst risk taken often equals reward, care must be taken in the early days post-election, especially that there may be some potential unknowns.
Based on history, any market upward momentum from a ‘reflation rally’ that has been running since September based on a Democratic win could run out of steam over the coming weeks, as reality hits with the societal and political issues the US faces with COVID-19, ongoing protests and perceived delays and softening in the enactment of any policy whilst the transition period takes place leading up to inauguration 20th January 2021.
Again, expect volatility in markets for reasons compounded by US policy enactment and uncertainty, COVID-19 across the US and greater Europe, including uncertainty US / China relations.
Putting it simply, its early days yet, and whilst some speculative Investors are taking ‘bets’ on the market by favouring certain outcomes of the Democrat victory, it may not be a wise strategy for a long-term investor. The reason is that long term returns, for example our superannuation savings, are driven by the strength of the global and domestic economy, and corporate (company) profitability, not so much politics.
Even if we look past the election, the immediacy of market volatility and the re-setting of a global path towards a possible ‘different world’, it is clear that COVID-19 and the hope for a vaccine, along with the unprecedented level of fiscal stimulus exercised by the majority of developed economies, including ultra-low interest rates, will have a longer term impact on markets and our own economy.
Also, with the pandemic-led structural changes to the way we live, the bringing forward of what we thought was years away - the next step in the age of digitisation and automation - will likewise continue to shape new economies and create market opportunities.
That is why at BT we believe in diversification across asset classes, regions and sectors to take advantage of global thematic and reduce risk as a result of that diversification.
In Australia, whilst we do have multiple trading partners, there will be industries and sectors that might be favoured based on the US election result, particularly where we have an existing global competitive advantage, or a dominant global market presence.
In addition to the above, and whilst not completely linked to the election results, nor directly the US / China political and trade relations, out of the ensuing stability post-election there is hope that over time US-China tensions will indeed abate and China’s trade relations will settle more positively with Australia. This will likewise benefit our cotton, coal, barley, meat, wine, and education industries.
It is important to bring into perspective that whilst the US election is a significant global event that deserves the attention it draws, there are other significant global issues playing out concurrently.
We as a society are still reeling from the global COVID-19 pandemic, the uncertainly around the future of the EU and UK relationship post Brexit, the long term and unknown real impacts of the unprecedented $Trillions of fiscal stimulus pumped into global economies, let alone the potential for a multi-year era of ultra-low interest rates. These factors will weigh heavily on market and investment sentiment and will be a far greater influence on investing and accumulation of our retirement outcomes looking ahead.
Remember that as an investor or active superannuation fund member, it is important to always do your research, understand what you are investing into, and the risks involved. Alternatively, it is always recommended that you seek the advice of a qualified financial adviser.
This document has been prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac) and is current as at 5 November 2020.
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it.